In a significant ruling by the Delhi High Court, a case pertaining to the utilization of funds by a Charitable Trust has been concluded. The judgment lays down important principles guiding the management and allocation of resources for charitable purposes, impacting various charitable organizations. This landmark decision sheds light on the intricate regulations surrounding income tax exemptions and fund allocations in the charitable sector.
Facts
- The Commissioner of Income Tax (Exemptions) has filed an appeal against the decision of the Income Tax Appellate Tribunal.
- The issue revolves around the withdrawal of exemption under Section 11(2) due to a short contravention period.
- The deemed income accrued from utilizing accumulated income for a different purpose is in question.
- The Tribunal’s view on treating the deemed income as eligible for deductions is being challenged.
- The appeal was admitted on 16 April 2018 based on the question of law related to a nil income return filed with an audit report in Form No.10B in 2009.
- The assessee filed a Revised Return of Income and Revised Statement of Computation of Total Income for the relevant year.
- The assessee offered to tax the ‘Deemed Income’ under section 11(3) of the Act.
- Exemption was claimed under Sections 11 and 12 of the Act.
- Statutory notice u/s 143(2) was issued and compliance was made.
- Total income declared in the return was NIL.
- Accumulated surplus under Section 11(2) was utilized for donations to other charitable trusts.
- CIT(A) ruled in favor of the assessee following a Calcutta High Court judgment.
- The AO disputed the CIT(A) decision and added the deemed income to total income.
- Revised return filed as precaution, claiming Rs. 20 crores as non-taxable under section 11(3).
- AO objected to fund utilization for donations to other trusts violating Section 11 provisions.
- Tribunal affirmed CIT(A) decision in favor of the assessee.
- Revised return was filed with fresh computation of income.
- Assessee had earlier accumulated income under Section 11(2) for charitable purposes.
- Revised return reasons included utilization of INR 20 crores for donations to other institutions.
- Assessee sought accumulation of 15% of deemed income, supported by payed tax amount.
- Appeal was made before CIT(A) regarding fund utilization and accumulation.
- Main aims and objects of the Trust included scientific research, education, and relief activities.
Analysis
- 1.1
- 1.2
- 1.3
- Section 11(3)(c) requires that the income accumulated should be utilized for the specific purpose for which it was accumulated.
- The term ‘utilized’ in Section 11(3)(c) should be interpreted as ‘applied’ in the context of charitable trusts.
- Section 11(3)(c) aims to prevent accumulation of income for non-charitable purposes or retention beyond a specified period.
- The provision allows for judicial supervision to ensure income is utilized for the intended charitable purposes.
- Explanation 2 clarifies that income credited or paid to certain designated entities will be treated as income of the trust.
- Explanation 2 clarifies that any amount credited or paid out of income for charitable purposes must adhere to specified conditions and not exceed five years of accumulation.
- The Tribunal ruled that contributions to charitable trusts are within the trustees’ power, especially when the trust deed authorizes the trustees to allocate funds for public welfare at their discretion.
- Contributing to other charitable organizations out of accumulated income under sub-section (2) is not considered applying income for non-charitable purposes.
- Section 11(3) states that income accumulated under Section 11(2) should be utilized for charitable or religious purposes; otherwise, it will be deemed as income of the trust in the following year.
- The interplay between Section 11(1) and Section 11(2) exempts a certain percentage of income for charitable purposes and allows accumulation of the remaining income if invested as specified.
- Section 11(1)(a) permits accumulation of 85% of income not used for charitable purposes while ensuring it does not exceed 15% of the total income.
- Explanation under Section 11(1) specifies that accumulated income credited to specific institutions is not deemed as charitable application.
- Donations made out of accumulated income under Section 11(2) are not tainted by the provisions.
- Explanation 1 and Section 11(2) provide mechanisms to prevent unutilized income from being included in the total income of the assessee.
- A judicial precedent in Director of Income-tax (Exemption) Vs. Acme Educational Society supports the view that specific transactions, like interest-free loans given by charitable societies, do not violate relevant tax provisions.
- Charitable institutions must adhere to the prescriptions of Section 11 for deductions under Section 80T.
- Deductions allowable under the Act in cases not regulated by Section 11 do not impact accumulation and application percentages under Section 11.
- The issue in question does not involve the regulations of Section 11 regarding accumulation and application of funds.
- The Tribunal’s decision in favor of the assessee was justified as the donations were quickly reversed and not permanently allotted.
- Section 11(3) adverse consequences apply if accumulated incomes are misused for non-charitable purposes within five years.
- In this case, no permanent endowment was made, and the donated money did not become permanently unavailable for application.
Decision
- The appeal has been dismissed.
- Original names of the parties involved were used throughout the judgment.
- The decision was in favor of the original respondent.
Case Title: COMMISSIONER OF INCOME TAX Vs. M/S JAMNALAL BAJAJ FOUNDATION (2024:DHC:4536-DB)
Case Number: ITA-808/2017
